Doom. Not!

Pressure of work and an incipient nervous breakdown has prevented me from commenting on the interesting spat-let between Felix Salmon and Epicurean Dealmaker, which you can follow here, here and here.

Felix, fellow-traveller to Baruch’s sanguine view of the current equity market, has been waging a one-man campaign against the majority of market commentators and blog commenters out there, cheerled by Barry Ritholtz, who are both a) big hairy bears, and b) convinced that the sub-prime brouhaha at Bear Stearns represents the catalyst for the imminent demise of the current bountiful incarnation of the market god. If you doubt the ubiquity of these views, just read Felix’s comments. Dealmaker’s point is a simple one, that leverage makes the CDO crisis more dangerous, and in that he is right.

In the case of Salmon vs Dealmaker, I back Dealmaker’s analysis, but believe Felix’s conclusions are the correct ones (and indeed, insofar as we have not collapsed, only risen, he has been proven right. So far).

While Dealmaker’s arguments would support the moaning minnie doom mongers’ position, I do not think that Dealmaker is necessarily one of them. I see hints of the bear, but refrain from lumping him with the rest of them, not least because his is the only blog that links to this one (Ultimi Barbarorum would reciprocate, but we don’t have a blogroll) . Biting the hand that feeds is not Baruch’s style. Felix’s point is a wider one however, that even if Dealmaker is right, we are probably not talking about a systemic risk; banks can fudge, “dark capital” can soak up the risk, and the risks have been easier to offset.

I would add the general point that might not be directly relevant here (I do not pretend to understand collateral debt, or in fact debt in general), but there are few more pleasurable, wealth-creating events for a hedge fund as the demise of one of their own. It’s not just schadenfreude. At the merest hint of weakness analysts pore over Bloomberg reports, ask IR guys for share registers and short the heck out anything they think the victim may own, hoping to benefit from forced sales. It’s one of the reasons HFs are so secretive. I know Andor Capital tried to get one hapless sell-side guy fired a few years ago merely because he had the temerity to ask whether they owned a particular stock or not. It can be a feeding frenzy, they are like sharks whose favourite meal is eating their own. I don’t know how big this effect is, but the net wealth effect a hedge fund blowup is not 100% negative.

You know my views. Personally, I am happy to be go-go Baruch and be fully invested even in riskier names until this strategy stops working, and then react in an extreme manner in the opposite direction. If that sticks and works I’ll stay pointed that way until it stops working too. So far this year I have seen everyone who takes on a more moderate stance get their faces ripped off, and add fuel to the slow burn upwards.

By far my biggest beef with the opposite, the perma-bear, view is this: it is unfalsifiable. It doesn’t fit the long term data. It’s dogma. Spinoza (who was in fact a stock and commodity trader before his excommunication), Hayek and Popper would probably be long. There is no point at which perma bears seem to admit they are wrong. Every up move makes the rewards of catching the downward move all the more tantalisingly huge. Any time now it will break. Most of these guys are also merely commentators. They have no skin in the game. They have no investors who call up and complain you are not making them money now, and they don’t get their soapboxes taken away. Like the Economist and Lex, they merely have to sound smart, and they don’t get punished for being wrong. My position, now that’s falsifiable. I know a 3-5% down move in a day or -10% in a week on super high volume means I probably have to do something, go to cash for a couple of months. A “black swan” event could wipe me out for sure. I’d certainly be wrong then. But these other guys? They’re just frogs being boiled. For now at least.